10-Q 1 eth_10q-033113.htm FORM 10-Q eth_10q-033113.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

[   ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number:  1-11692

Ethan Allen Interiors Inc
(Exact name of registrant as specified in its charter)

Delaware
 
06-1275288
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)


Ethan Allen Drive, Danbury, Connecticut
 
            06811
(Address of principal executive offices)
 
       (Zip Code)


(203) 743-8000
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X] Yes[   ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  [X] Yes [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act

Large accelerated filer
[ ]
Accelerated filer
[X]
Non-accelerated filer
[ ]
Smaller reporting company
[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).[   ] Yes[X] No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
At April 23, 2013, there were 28,904,463 shares of Class A Common Stock,
par value $.01, outstanding.
 
 
 

 

Table of Contents

PART I - FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
 
Consolidated Balance Sheets
2
Consolidated Statements of Comprehensive Income
3
Consolidated Statements of Cash Flows
4
Consolidated Statements of Shareholders’ Equity
5
Notes to Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
Item 4. Controls and Procedures
28
   
PART II - OTHER INFORMATION
 
   
Item 1. Legal Proceedings
28
Item 1A. Risk Factors
28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
29
Item 3. Defaults Upon Senior Securities
29
Item 4. Mine Safety Disclosures
29
Item 5. Other Information
29
Item 6. Exhibits
30
SIGNATURES
31
 
 
1

 
 
PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
Consolidated Balance Sheets
(In thousands)
 
   
March 31, 2013
   
June 30, 2012
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 83,645     $ 79,721  
Marketable securities
    18,176       9,005  
Accounts receivable, less allowance for doubtful accounts of $1,200 at March 31, 2013 and $1,250 at June 30, 2012
    11,344       14,919  
Inventories
    142,041       155,739  
Prepaid expenses and other current assets
    22,580       23,408  
Total current assets
    277,786       282,792  
Property, plant and equipment, net
    294,080       295,695  
Goodwill and other intangible assets
    45,128       45,128  
Restricted cash and investments
    15,430       15,416  
Other assets
    5,882       5,757  
Total assets
  $ 638,306     $ 644,788  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 469     $ 250  
Customer deposits
    59,532       65,465  
Accounts payable
    25,416       27,315  
Accrued compensation and benefits
    24,175       30,534  
Accrued expenses and other current liabilities
    26,064       27,513  
Total current liabilities
    135,656       151,077  
Long-term debt
    154,836       154,250  
Other long-term liabilities
    18,664       17,593  
Total liabilities
    309,156       322,920  
Shareholders' equity:
               
Class A common stock
    486       485  
Additional paid-in-capital
    363,375       361,165  
Less: Treasury stock (at cost)
    (584,041 )     (584,041 )
Retained earnings
    547,502       542,918  
Accumulated other comprehensive income
    1,613       1,141  
Total Ethan Allen Interiors Inc. shareholders' equity
    328,935       321,668  
Noncontrolling interests
    215       200  
Total shareholders' equity
    329,150       321,868  
Total liabilities and shareholders' equity
  $ 638,306     $ 644,788  
 
See accompanying notes to consolidated financial statements.
 
 
2

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except per share data)

   
Three months ended
March 31,
   
Nine months ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Net sales
  $ 168,144     $ 175,861     $ 546,832     $ 544,057  
Cost of sales
    76,359       81,586       246,827       253,678  
Gross profit
    91,785       94,275       300,005       290,379  
Selling, general and administrative expenses
    83,125       86,488       256,034       255,016  
Operating income
    8,660       7,787       43,971       35,363  
Interest and other miscellaneous income, net
    (10 )     157       192       362  
Interest and other related financing costs
    2,195       2,189       6,592       6,814  
Income before income taxes
    6,455       5,755       37,571       28,911  
Income tax expense (benefit)
    2,081       (21,793 )     13,287       (13,484 )
Net income
  $ 4,374     $ 27,548     $ 24,284     $ 42,395  
                                 
Per share data:
                               
Basic earnings per common share:
                               
Net income per basic share
  $ 0.15     $ 0.95     $ 0.84     $ 1.47  
Basic weighted average common shares
    28,869       28,857       28,850       28,813  
Diluted earnings per common share:
                               
Net income per diluted share
  $ 0.15     $ 0.94     $ 0.83     $ 1.46  
Diluted weighted average common shares
    29,273       29,236       29,213       29,085  
                                 
Comprehensive income:
                               
Net income
  $ 4,374     $ 27,548     $ 24,284     $ 42,395  
Other comprehensive income
                               
Currency translation adjustment
    300       1,774       440       (467 )
Other
    7       (34 )     47       (35 )
Other comprehensive income (loss) net of tax
    307       1,740       487       (502 )
Comprehensive income
  $ 4,681     $ 29,288     $ 24,771     $ 41,893  

See accompanying notes to consolidated financial statements.
 
 
3

 
 
ETHAN ALLEN INTERIORS INC.
 
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

   
Nine months ended
March 31,
 
   
2013
   
2012
 
Operating activities:
               
Net income
  $ 24,284     $ 42,395  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    13,514       14,092  
Compensation expense related to share-based payment awards
    1,115       1,218  
Provision (benefit) for deferred income taxes
    597       (20,501 )
(Gain) loss on disposal of property, plant and equipment
    3,696       1,645  
Other
    172       193  
                 
Change in operating assets and liabilities, net of effects of acquired businesses:
               
Accounts receivable
    2,855       (3,108 )
Inventories
    13,808       946  
Prepaid and other current assets
    2,054       (2,497 )
Customer deposits
    (6,567 )     (1,622 )
Accounts payable
    (1,899 )     (303 )
Accrued expenses and other current liabilities
    (8,241 )     (3,519 )
Other assets and liabilities
    (943 )     (1,106 )
Net cash provided by operating activities
    44,445       27,833  
                 
Investing activities:
               
Proceeds from the disposal of property, plant & equipment
    3,226       1,792  
Change in restricted cash and investments
    (14 )     981  
Capital expenditures
    (16,545 )     (19,836 )
Acquisitions
    (598 )     (520 )
Purchases of marketable securities
    (17,547 )     (3,290 )
Sales of marketable securities
    7,990       4,675  
Other investing activities
    1,333       773  
Net cash used in investing activities
    (22,155 )     (15,425 )
                 
Financing activities:
               
Payments on long-term debt and capital lease obligations
    (187 )     (12,145 )
Purchases and retirements of company stock
    -       (847 )
Payment of cash dividends
    (19,617 )     (6,046 )
Other financing activities
    1,423       500  
Net cash used in financing activities
    (18,381 )     (18,538 )
Effect of exchange rate changes on cash
    15       741  
Net increase (decrease) in cash & cash equivalents
    3,924       (5,389 )
Cash & cash equivalents at beginning of period
    79,721       78,519  
Cash & cash equivalents at end of period
  $ 83,645     $ 73,130  

See accompanying notes to consolidated financial statements.
 
 
4

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
Consolidated Statements of Shareholders’ Equity
Nine Months Ended March 31, 2013
(Unaudited)
(In thousands)

   
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income
   
Retained
Earnings
   
Non-
Controlling
Interests
   
Total
 
Balance at June 30, 2012
  $ 485     $ 361,165     $ (584,041 )   $ 1,141     $ 542,918     $ 200     $ 321,868  
                                                         
Issuance of common shares upon the exercise of share-based awards
    1       1,256       -       -       -       -       1,257  
                                                         
Compensation expense associated with share-based awards
    -       1,115       -       -       -       -       1,115  
                                                         
Tax benefit associated with exercise of share based awards
    -       (161 )     -       -       -       -       (161 )
                                                         
Dividends declared on common stock
    -       -       -       -       (19,700 )     -       (19,700 )
                                                         
Comprehensive income
    -       -       -       472       24,284       15       24,771  
Balance at March 31, 2013
  $ 486     $ 363,375     $ (584,041 )   $ 1,613     $ 547,502     $ 215     $ 329,150  
 
See accompanying notes to consolidated financial statements.
 
 
5

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
(1)   Basis of Presentation
 
Ethan Allen Interiors Inc. ("Interiors") is a Delaware corporation incorporated on May 25, 1989. The consolidated financial statements include the accounts of Interiors, its wholly owned subsidiary Ethan Allen Global, Inc. ("Global"), and Global’s subsidiaries (collectively "We", "Us", "Our", "Ethan Allen", or the "Company"). All intercompany accounts and transactions have been eliminated in the consolidated financial statements. All of Global’s capital stock is owned by Interiors, which has no assets or operating results other than those associated with its investment in Global.
 
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been made include, but are not limited to, revenue recognition, the allowance for doubtful accounts receivable, inventory obsolescence, tax valuation allowances, useful lives for property, plant and equipment and definite-lived intangible assets, goodwill and indefinite-lived intangible asset impairment analyses, the evaluation of uncertain tax positions and the fair value of assets acquired and liabilities assumed in business combinations.
 
Our consolidated financial statements include the accounts of a business entity which began operating a new Ethan Allen design center in Florida in fiscal 2012. Our consolidated financial statements include the accounts of this entity because we are a majority shareholder and have the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity, which are immaterial, are included in the Consolidated Statement of Comprehensive Income within interest and other miscellaneous income, net.
 
For the three and nine months ended March 31, 2013 and 2012, the Company has presented selling, general and administrative expenses as a single line on the Consolidated Statements of Comprehensive Income, to remove information we believe is not meaningful and to improve comparability with peer companies. Selling expenses, general and administrative expenses, and restructuring and impairment charges had previously been presented separately.
 
(2)   Interim Financial Presentation
 
In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and nine months ended March 31, 2013 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended June 30, 2012.
 
(3)   Income Taxes
 
The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are not normal and are non-recurring in nature and treats these as discrete events. The tax effect of discrete items is recorded in the quarter in which the discrete events occur. Due to the volatility of these factors, the Company's consolidated effective income tax rate can change significantly on a quarterly basis.
 
The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S., various state, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by the taxing authorities in such major jurisdictions as the U.S, Canada, Mexico and Honduras. As of March 31, 2013, the Company and certain subsidiaries are currently under audit from 2006 through 2010 in the U.S. While the amount of uncertain tax benefits with respect to the entities and years under audit may change within the next twelve months, it is not anticipated that any of the changes will be significant. It is reasonably possible that some of these audits may be completed during the next twelve months. It is reasonable to expect that various issues relating to uncertain tax benefits will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.
 
 
6

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
As a result of losses we sustained for fiscal 2010 and 2009, which were brought on by the severe economic factors which began in fiscal 2009, we recorded a $34.1 million valuation allowance against deferred tax assets, with a non-cash charge to earnings in the fourth quarter of fiscal 2010. At the end of the third quarter of fiscal 2012, our operations had returned to a position of cumulative pre-tax operating profits for the most recent 36 month period, we had eight consecutive quarters of pre-tax operating profits, our written business and backlog had grown significantly, and our business plan projected continued profitability. The preponderance of this positive evidence provides support that our future tax benefits more likely than not will be realized. Accordingly, at the end of the third quarter of fiscal 2012, we released all of United States federal, most of the state, and all of the Canadian valuation allowance against net deferred tax assets. We recorded a tax benefit of $21.6 million for the reversal of the valuation allowance against those assets, with a non-cash benefit to earnings in the quarter ended March 31, 2012.
 
We retained a valuation allowance against various state and local deferred tax assets in our retail segment. At March 31, 2013 this valuation allowance was approximately $2.3 million.
 
The Company’s consolidated effective tax rate was 32.2% and 35.4% for the three and nine months ended March 31, 2013, respectively and a negative 378.7% and a negative 46.6% for the three and nine months ended March 31, 2012 respectively. The current quarter effective tax rate primarily includes tax expense on the current quarter’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances, partly offset by the recognition of some uncertain tax positions. The prior period effective tax rate includes the benefit from the reversal of the valuation allowance, and the recognition of previously unrecognized tax benefits, partly offset by the tax expense on the current quarter’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on deferred tax assets in the retail segment.
 
(4)   Restricted Cash and Investments
 
At both March 31, 2013 and June 30, 2012, we held $15.4 million of restricted cash and investments in lieu of providing letters of credit for the benefit of the provider of our workmen’s compensation and other insurance and for the benefit of the issuer of our private label credit card. These funds can be invested in high quality money market mutual funds, U.S. Treasuries and U.S. Government agency fixed income instruments, and cannot be withdrawn without the prior written consent of the secured party. These assets are carried at cost, which approximates market value and are classified as long-term assets because they are not expected to be used within one year to fund operations. See also Note 12, “Fair Value Measurements".
 
(5)   Marketable Securities
 
At March 31, 2013 and June 30, 2012, the Company held marketable securities of $18.2 million and $9.0 million respectively, classified as current assets, consisting of U.S. municipal and corporate bonds with maturities ranging from less than one year to less than two years, which were rated A/A2 or better by the rating services Standard & Poors (“S&P”) and Moodys Investors Service (“Moodys”) respectively. There have been no material realized or unrealized gains or losses for the nine months ended March 31, 2013 and March 31, 2012. We do not believe there are any impairments considered to be other than temporary at March 31, 2013. Also see Note 12, “Fair Value Measurements"
 
 
7

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
(6)   Inventories
 
Inventories at March 31, 2013 and June 30, 2012 are summarized as follows (in thousands):
 
   
March 31,
2013
   
June 30,
2012
 
             
Finished goods
  $ 112,510     $ 119,978  
Work in process
    6,929       8,638  
Raw materials
    22,602       27,123  
    $ 142,041     $ 155,739  
 
Inventories are presented net of a related valuation allowance of $2.9 million at March 31, 2013 and $2.7 million at June 30, 2012.
 
(7)   Borrowings
 
Total debt obligations at March 31, 2013 and June 30, 2012 consist of the following (in thousands):
 
   
March 31,
2013
   
June 30,
2012
 
5.375% Senior Notes due 2015
  $ 153,078     $ 152,986  
Capital leases and other
    2,227       1,514  
Total debt
    155,305       154,500  
Less current maturities
    469       250  
Total long-term debt
  $ 154,836     $ 154,250  

 
In September 2005, we issued $200.0 million in ten-year senior unsecured notes due 2015 (the "Senior Notes"). The Senior Notes were issued by Global, bearing an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1. We have used the net proceeds of $198.4 million to improve our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes. During the full fiscal years 2012 and 2011, the Company reduced its Senior Notes by an aggregate face value of $46.6 million through unsolicited purchases.
 
We also maintain a $50 million senior secured, asset-based revolving credit facility (the “Facility”). We have not had any revolving loans under the Facility at any time. At March 31, 2013 and June 30, 2012, there were $0.6 million of standby letters of credit outstanding under the Facility. The Facility is subject to borrowing base availability and includes a right for the Company to increase the total facility to $100 million subject to certain conditions. The Facility is secured by all property owned, leased or operated by the Company in the United States excluding any real property owned by the Company and contains customary covenants which may limit the Company’s ability to incur debt, engage in mergers and consolidations, make restricted payments (including dividends), sell certain assets, and make investments. Remaining availability under the Facility totaled $49.4 million at March 31, 2013 and at June 30, 2012 and as a result, covenants and other restricted payment limitations did not apply. The Facility expires March 25, 2016, or June 26, 2015 if the Senior Notes have not been refinanced prior to that date.
 
At March 31, 2013 and June 30, 2012, we were in compliance with all covenants of the Senior Notes and the Facility.
 
(8)   Litigation
 
Environmental Matters
 
We and our subsidiaries are subject to various environmental laws and regulations. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment of the disposal or release of certain hazardous materials. As of March 31, 2013 and June 30, 2012, we believe that the Company was adequately reserved. We believe our currently anticipated capital expenditures for environmental control facility matters are not material.
 
 
8

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
We are subject to other federal, state and local environmental protection laws and regulations and are involved, from time to time, in investigations and proceedings regarding environmental matters. Such investigations and proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes. We believe that our facilities are in material compliance with all such applicable laws and regulations.
 
Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. We will continue to evaluate the most appropriate, cost effective, control technologies for finishing operations and design production methods to reduce the use of hazardous materials in the manufacturing process.
 
(9)   Share-Based Compensation
 
During the nine months ended March 31, 2013, the Company awarded options to purchase 74,082 shares of our common stock with a weighted average exercise price per share of $22.42, a weighted average fair value per share of $9.96 and vesting periods ranging from three to four years. During the nine months ended March 31, 2013, options covering 623,500 shares of common stock were cancelled, primarily due to the expiration of their 10 year term. At March 31, 2013, there are 1,055,682 shares of common stock available for future issuance pursuant to the 1992 Stock Option Plan.
 
(10) Earnings Per Share
 
Basic and diluted earnings per share are calculated using the following weighted average share data (in thousands):
 
 
   
Three months ended
March 31,
   
Nine months ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Weighted average common shares outstanding for basic calculation
    28,869       28,857       28,850       28,813  
Effect of dilutive stock options and other share-based awards
    404       379       363       272  
Weighted average common shares outstanding adjusted for dilution calculation
    29,273       29,236       29,213       29,085  

 
As of March 31, 2013 and 2012, stock options to purchase 885,600 and 1,540,000 common shares, respectively, were excluded from the respective diluted earnings per share calculation because their impact was anti-dilutive.
 
 
9

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
(11) Comprehensive Income
 
Our accumulated other comprehensive income, which is comprised of losses on certain derivative instruments, accumulated foreign currency translation adjustments, and unrealized gain and loss on investments, totaled $1.6 million at March 31, 2013 and $1.1 million at June 30, 2012. Foreign currency translation adjustments are the result of changes in foreign currency exchange rates related to our operations in Canada, Mexico, Honduras and Belgium. Foreign currency translation adjustments exclude income tax expense (benefit) given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time. Beginning with the first quarter of fiscal 2013, the company reports comprehensive income in a single continuous statement of comprehensive income. See also Note 14, “Recently Issued Accounting Pronouncements”.
 
(12) Fair Value Measurements
 
We determine fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants use in pricing the asset or liability, and not on assumptions specific to the Company. In addition, the fair value of liabilities includes consideration of non-performance risk including our own credit risk. Each fair value measurement is reported in one of three levels, determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
 
Level 1  Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
 
Level 2  Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3  Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
 
The following section describes the valuation methodologies we use to measure different financial assets and liabilities at fair value.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
The following table presents our assets and liabilities measured at fair value on a recurring basis at March 31, 2013 and June 30, 2012 (in thousands):
 
March 31, 2013
 
   
Level 1
   
Level 2
   
Level 3
   
Balance
 
Cash equivalents
  $ 99,075     $ -     $ -     $ 99,075  
Available-for-sale securities
    -       18,176       -       18,176  
Total
  $ 99,075     $ 18,176     $ -     $ 117,251  

 
June 30, 2012
 
   
Level 1
   
Level 2
   
Level 3
   
Balance
 
Cash equivalents
  $ 95,137     $ -     $ -     $ 95,137  
Available-for-sale securities
    -       9,005       -       9,005  
Total
  $ 95,137     $ 9,005     $ -     $ 104,142  
 
Cash equivalents consist of money market accounts and mutual funds in U.S. government and agency fixed income securities. We use quoted prices in active markets for identical assets or liabilities to determine fair value. There were no transfers between level 1 and level 2 during the first nine months of fiscal 2013 or fiscal 2012. At both March 31, 2013 and June 30, 2012, $15.4 million of the cash equivalents were restricted, and classified as a long-term asset.
 
 
10

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
At March 31, 2013, available-for-sale securities consist of $16.7 million in U.S. municipal bonds and $1.5 million of corporate bonds, and at June 30, 2012, available-for-sale securities consisted of $7.5 million in U.S. municipal bonds and $1.5 million of corporate bonds, all with maturities of less than two years. The bonds are rated A/A2 or better by S&P/Moodys respectively. As of March 31, 2013 and June 30, 2012, there were no material gross unrealized gains or losses on available-for-sale securities.
 
As of March 31, 2013 and June 30, 2012, the contractual maturities of our available-for-sale securities were as follows:
 

 
March 31, 2013
 
   
Cost
   
Estimated Fair Value
 
Due in one year or less
  $ 15,053     $ 14,987  
Due after one year through five years
  $ 3,183     $ 3,189  
 
June 30, 2012
 
   
Cost
   
Estimated Fair Value
 
Due in one year or less
  $ 6,999     $ 6,862  
Due after one year through five years
  $ 2,130     $ 2,143  
 
No investments have been in a continuous loss position for more than one year, and no other-than-temporary impairments were recognized. Also see Note 4, "Restricted Cash and Investments" and Note 5, "Marketable Securities".
 
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
 
We measure certain assets at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be impaired. During the nine month period ended March 31, 2013 we recorded a $1.6 million impairment against assets held for sale, and during the nine months ended March 31, 2012, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.
 
(13) Segment Information
 
Our operations are classified into two operating segments: wholesale and retail. These operating segments represent strategic business areas which, although they operate separately and provide their own distinctive services, enable us to more effectively offer our complete line of home furnishings and accessories.
 
The wholesale segment is principally involved in the development of the Ethan Allen brand, which encompasses the design, manufacture, domestic and offshore sourcing, sale and distribution of a full range of home furnishings and accessories to a network of independently operated and Ethan Allen operated design centers as well as related marketing and brand awareness efforts. Wholesale revenue is generated upon the wholesale sale and shipment of our product to all retail design centers, including those operated by Ethan Allen. Wholesale profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale sales price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating costs associated with wholesale segment activities.
 
The retail segment sells home furnishings and accessories to consumers through a network of Company operated design centers. Retail revenue is generated upon the retail sale and delivery of our product to our customers. Retail profitability includes (i) the retail gross margin, which represents the difference between the retail sales price and the cost of goods purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities.
 
Inter-segment eliminations result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.
 
 
11

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
We evaluate performance of the respective segments based upon revenues and operating income. While the manner in which our home furnishings and accessories are marketed and sold is consistent, the nature of the underlying recorded sales (i.e. wholesale versus retail) and the specific services that each operating segment provides (i.e. wholesale manufacturing, sourcing, and distribution versus retail selling) are different. Within the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, or home accessories and other). The allocation of retail sales by product line is reasonably similar to that of the wholesale segment. A breakdown of wholesale sales by these product lines for the three and nine months ended March 31, 2013 and 2012 is provided as follows:
 
   
Three months ended
March 31,
   
Nine months ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Case Goods
    36 %     39 %     37 %     39 %
Upholstered Products
    48 %     43 %     48 %     44 %
Home Accessories and Other
    16 %     18 %     15 %     17 %
      100 %     100 %     100 %     100 %
 
Segment information for the three and nine months ended March 31, 2013 and 2012 is provided below (in thousands):
 
   
Three months ended
March 31,
   
Nine months ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Net sales:
                       
Wholesale segment
  $ 108,101     $ 121,044     $ 327,690     $ 344,069  
Retail segment
    132,056       131,402       432,962       415,687  
Elimination of inter-company sales
    (72,013 )     (76,585 )     (213,820 )     (215,699 )
Consolidated Total
  $ 168,144     $ 175,861     $ 546,832     $ 544,057  
                                 
Operating income (loss):
                               
Wholesale segment
  $ 12,754     $ 18,191     $ 37,651     $ 49,584  
Retail segment
    (2,283 )     (6,549 )     4,782       (10,578 )
Adjustment of inter-company profit (1)
    (1,811 )     (3,855 )     1,538       (3,643 )
Consolidated Total
  $ 8,660     $ 7,787     $ 43,971     $ 35,363  
                                 
Depreciation & Amortization:
                               
Wholesale segment
  $ 2,135     $ 1,733     $ 6,116     $ 5,717  
Retail segment
    2,413       2,777       7,398       8,375  
Consolidated Total
  $ 4,548     $ 4,510     $ 13,514     $ 14,092  
                                 
Capital expenditures:
                               
Wholesale segment
  $ 1,381     $ 1,366     $ 6,024     $ 9,769  
Retail segment
    1,599       7,078       10,521       10,067  
Acquisitions
    -       520       598       520  
Consolidated Total
  $ 2,980     $ 8,964     $ 17,143     $ 20,356  
 
 
12

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
   
March 31,
2013
   
June 30,
2012
 
Total Assets:
           
Wholesale segment
  $ 305,171     $ 309,573  
Retail segment
    362,950       366,594  
Inventory profit elimination (2)
    (29,815 )     (31,379 )
Consolidated Total
  $ 638,306     $ 644,788  
 
(1)
Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.
(2)
Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold.

At both March 31 of 2013 and 2012, there were 86 independent retail design centers located outside the United States. Approximately 5.4% of our net sales during the current nine months were derived from sales to international retail design centers compared with 6.5% in the comparable prior year period.
 
(14) Recently Issued Accounting Pronouncements
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Presentation of Comprehensive Income”. This ASU increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income. The Company adopted this ASU in the first quarter of fiscal 2013 and included a single continuous statement.
 
(15) Financial Information About the Parent, the Issuer and the Guarantors
 
 On September 27, 2005, Global (the "Issuer") issued $200 million aggregate principal amount of Senior Notes which have been guaranteed on a senior basis by Interiors (the "Parent"), and other wholly owned domestic subsidiaries of the Issuer and the Parent, including Ethan Allen Retail, Inc., Ethan Allen Operations, Inc., Ethan Allen Realty, LLC, Lake Avenue Associates, Inc. and Manor House, Inc. The subsidiary guarantors (other than the Parent) are collectively called the "Guarantors". The guarantees of the Guarantors are unsecured. All of the guarantees are full, unconditional and joint and several and the Issuer and each of the Guarantors are 100% owned by the Parent. Our other subsidiaries which are not guarantors are called the "Non-Guarantors".
 
 
13

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
The following tables set forth the condensed consolidating balance sheets as of March 31, 2013 and June 30, 2012, the condensed consolidating statements of operations for the three and nine months ended March 31, 2013 and 2012, and the condensed consolidating statements of cash flows for the nine months ended March 31, 2013 and 2012 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.
 
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
March 31, 2013
 
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                                   
Current assets:
                                   
Cash and cash equivalents
  $ -     $ 67,474     $ 13,001     $ 3,170     $ -     $ 83,645  
Marketable securities
    -       18,176       -       -       -       18,176  
Accounts receivable, net
    -       11,112       231       1       -       11,344  
Inventories
    -       -       166,520       5,336       (29,815 )     142,041  
Prepaid expenses and other current assets
    -       8,062       12,744       1,774       -       22,580  
Intercompany receivables
    -       844,039       295,163       (8,372 )     (1,130,830 )     -  
Total current assets
    -       948,863       487,659       1,909       (1,160,645 )     277,786  
Property, plant and equipment, net
    -       9,656       267,586       16,838       -       294,080  
Goodwill and other intangible assets
    -       37,905       7,223       -       -       45,128  
Restricted cash and investments
    -       15,430       -       -       -       15,430  
Other assets
    -       3,507       1,558       817       -       5,882  
Investment in affiliated companies
    678,728       (112,156 )     -       -       (566,572 )     -  
Total assets
  $ 678,728     $ 903,205     $ 764,026     $ 19,564     $ (1,727,217 )   $ 638,306  
Liabilities and Shareholders’ Equity
                                               
Current liabilities:
                                               
Current maturities of long-term debt
  $ -     $ -     $ 469     $ -     $ -     $ 469  
Customer deposits
    -       -       56,957       2,575       -       59,532  
Accounts payable
    -       9,879       15,012       525       -       25,416  
Accrued expenses and other current liabilities
    2,747       31,751       14,471       1,270       -       50,239  
Intercompany payables
    346,831       (2,723 )     770,576       16,146       (1,130,830 )     -  
Total current liabilities
    349,578       38,907       857,485       20,516       (1,130,830 )     135,656  
Long-term debt
    -       153,078       1,758       -       -       154,836  
Other long-term liabilities
    -       3,926       14,524       214       -       18,664  
Total liabilities
    349,578       195,911       873,767       20,730       (1,130,830 )     309,156  
Shareholders’ equity
    329,150       707,294       (109,741 )     (1,166 )     (596,387 )     329,150  
Total liabilities and shareholders’ equity
  $ 678,728     $ 903,205     $ 764,026     $ 19,564     $ (1,727,217 )   $ 638,306  

 
14

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
June 30, 2012
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                                   
Current assets:
                                   
Cash and cash equivalents
  $ -     $ 64,946     $ 12,276     $ 2,499     $ -       79,721  
Marketable securities
    -       9,005       -       -       -       9,005  
Accounts receivable, net
    -       14,648       263       8       -       14,919  
Inventories
    -       -       182,382       4,736       (31,379 )     155,739  
Prepaid expenses and other current assets
    -       6,191       14,689       2,528       -       23,408  
Intercompany receivables
    -       829,913       273,536       (8,515 )     (1,094,934 )     -  
Total current assets
    -       924,703       483,146       1,256       (1,126,313 )     282,792  
Property, plant and equipment, net
    -       9,078       272,228       14,389       -       295,695  
Goodwill and other intangible assets
    -       37,905       7,223       -       -       45,128  
Restricted cash and investments
    -       15,416       -       -       -       15,416  
Other assets
    -       4,948       809       -       -       5,757  
Investment in affiliated companies
    652,868       (108,864 )     -       -       (544,004 )     -  
Total assets
  $ 652,868     $ 883,186     $ 763,406     $ 15,645     $ (1,670,317 )   $ 644,788  
Liabilities and Shareholders’ Equity
                                               
Current liabilities:
                                               
Current maturities of long-term debt
  $ -     $ -     $ 250     $ -     $ -     $ 250  
Customer deposits
    -       -       62,479       2,986       -       65,465  
Accounts payable
    -       7,126       19,695       494       -       27,315  
Accrued expenses and other current liabilities
    2,713       35,752       18,537       1,045       -       58,047  
Intercompany payables
    328,287       327       756,513       9,807       (1,094,934 )     -  
Total current liabilities
    331,000       43,205       857,474       14,332       (1,094,934 )     151,077  
Long-term debt
    -       152,986       1,264       -       -       154,250  
Other long-term liabilities
    -       3,641       13,874       78       -       17,593  
Total liabilities
    331,000       199,832       872,612       14,410       (1,094,934 )     322,920  
Shareholders’ equity
    321,868       683,354       (109,206 )     1,235       (575,383 )     321,868  
Total liabilities and shareholders’ equity
  $ 652,868     $ 883,186     $ 763,406     $ 15,645     $ (1,670,317 )   $ 644,788  
 
 
15

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
Three months ended March 31, 2013

   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 108,595     $ 188,589     $ 9,311     $ (138,351 )   $ 168,144  
Cost of sales
    -       81,631       124,977       5,959       (136,208 )     76,359  
Gross profit
    -       26,964       63,612       3,352       (2,143 )     91,785  
Total operating expenses
    45       12,817       65,310       4,953       -       83,125  
Operating income (loss)
    (45 )     14,147       (1,698 )     (1,601 )     (2,143 )     8,660  
Interest and other miscellaneous income, net
    4,419       (2,404 )     5       (131 )     (1,899 )     (10 )
Interest and other related financing costs
    -       2,180       15       -       -       2,195  
Income (loss) before income taxes
    4,374       9,563       (1,708 )     (1,732 )     (4,042 )     6,455  
Income tax expense (benefit)
    -       3,001       (943 )     23       -       2,081  
Net income/(loss)
  $ 4,374     $ 6,562     $ (765 )   $ (1,755 )   $ (4,042 )   $ 4,374  
 
 
 
Three months ended March 31, 2012
 
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 121,425     $ 191,275     $ 7,971     $ (144,810 )   $ 175,861  
Cost of sales
    -       89,850       127,738       4,704       (140,706 )     81,586  
Gross profit
    -       31,575       63,537       3,267       (4,104 )     94,275  
Total operating expenses
    45       11,969       70,764       3,710       -       86,488  
Operating income (loss)
    (45 )     19,606       (7,227 )     (443 )     (4,104 )     7,787  
Interest and other miscellaneous income, net
    27,593       (6,598 )     66       (36 )     (20,868 )     157  
Interest and other related financing costs
    -       2,180       9       -       -       2,189  
Income (loss) before income taxes
    27,548       10,828       (7,170 )     (479 )     (24,972 )     5,755  
Income tax expense (benefit)
    -       (20,869 )     (947 )     23       -       (21,793 )
Net income/(loss)
  $ 27,548     $ 31,697     $ (6,223 )   $ (502 )   $ (24,972 )   $ 27,548  

 
16

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
Nine months ended March 31, 2013
 
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 327,987     $ 594,200     $ 29,040     $ (404,395 )   $ 546,832  
Cost of sales
    -       247,433       387,459       17,894       (405,959 )     246,827  
Gross profit
    -       80,554       206,741       11,146       1,564       300,005  
Total operating expenses
    135       35,171       207,116       13,612       -       256,034  
Operating income (loss)
    (135 )     45,383       (375 )     (2,466 )     1,564       43,971  
Interest and other miscellaneous income, net
    24,419       (2,923 )     30       (206 )     (21,128 )     192  
Interest and other related financing costs
    -       6,546       46       -       -       6,592  
Income (loss) before income taxes
    24,284       35,914       (391 )     (2,672 )     (19,564 )     37,571  
Income tax expense
    -       13,059       159       69       -       13,287  
Net income/(loss)
  $ 24,284     $ 22,855     $ (550 )   $ (2,741 )   $ (19,564 )   $ 24,284  
 
 
Nine months ended March 31, 2012
 
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 343,988     $ 582,651     $ 25,399     $ (407,981 )   $ 544,057  
Cost of sales
    -       256,237       387,435       14,340       (404,334 )     253,678  
Gross profit
    -       87,751       195,216       11,059       (3,647 )     290,379  
Total operating expenses
    135       34,427       209,908       10,546       -       255,016  
Operating income (loss)
    (135 )     53,324       (14,692 )     513       (3,647 )     35,363  
Interest and other miscellaneous income, net
    42,530       (13,108 )     211       (30 )     (29,241 )     362  
Interest and other related financing costs
    -       6,805       9       -       -       6,814  
Income (loss) before income taxes
    42,395       33,411       (14,490 )     483       (32,888 )     28,911  
Income tax expense (benefit)
    -       (12,766 )     (777 )     59       -       (13,484 )
Net income/(loss)
  $ 42,395     $ 46,177     $ (13,713 )   $ 424     $ (32,888 )   $ 42,395  
 
 
17

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
Nine months ended March 31, 2013
 
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net cash provided by (used in) operating activities
  $ 18,360     $ 12,214     $ 10,950     $ 2,921     $ -     $ 44,445  
Cash flows from investing activities:
                                               
Capital expenditures
    -       (1,115 )     (13,165 )     (2,265 )     -       (16,545 )
Acquisitions
    -       -       (598 )     -       -       (598 )
Proceeds from the disposal of property, plant and equipment
    -       51       3,175       -       -       3,226  
Change in restricted cash and investments
    -       (14 )     -       -       -       (14 )
Purchases of marketable securities
    -       (17,547 )     -       -       -       (17,547 )
Sales of marketable securities
    -       7,990       -       -       -       7,990  
Other
    -       783       550       -       -       1,333  
Net cash provided by (used in) investing activities
    -       (9,852 )     (10,038 )     (2,265 )     -       (22,155 )
Cash flows from financing activities:
                                               
Payments on long-term debt
    -       -       (187 )     -       -       (187 )
Dividends paid
    (19,617 )     -       -       -       -       (19,617 )
Other
    1,257       166       -       -       -       1,423  
Net cash provided by (used in) financing activities
    (18,360 )     166       (187 )     -       -       (18,381 )
Effect of exchange rate changes on cash
    -       -       -       15       -       15  
Net increase (decrease) in cash and cash equivalents
    -       2,528       725       671       -       3,924  
Cash and cash equivalents – beginning of period
    -       64,946       12,276       2,499       -       79,721  
Cash and cash equivalents – end of period
  $ -     $ 67,474     $ 13,001     $ 3,170     $ -     $ 83,645  
 
18

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

 
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
Nine months ended March 31, 2012
 
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net cash provided by (used in) operating activities
  $ 6,668     $ 2,161     $ 16,667     $ 2,337     $ -     $ 27,833  
Cash flows from investing activities:
                                               
Capital expenditures
    -       (1,592 )     (16,833 )     (1,411 )     -       (19,836 )
Acquisitions
    -       -       (520 )     -       -       (520 )
Proceeds from the disposal of property, plant and equipment
    -       -       1,792       -       -       1,792  
Change in restricted cash and investments
    -       981       -       -       -       981  
Purchases of marketable securities
    -       (3,290 )     -       -       -       (3,290 )
Sales of marketable securities
    -       4,675       -       -       -       4,675  
Other
    -       262       511       -       -       773  
Net cash provided by (used in) investing activities
    -       1,036       (15,050 )     (1,411 )     -       (15,425 )
Cash flows from financing activities:
                                               
Payments on long-term debt
    -       (11,918 )     (227 )     -       -       (12,145 )
Dividends paid
    (6,046 )     -       -       -       -       (6,046 )
Purchases and other retirements of company stock
    (847 )     -       -       -       -       (847 )
Other
    225       -       275       -       -       500  
Net cash provided by (used in) financing activities
    (6,668 )     (11,918 )     48       -       -       (18,538 )
Effect of exchange rate changes on cash
    -       -       -       741       -       741  
Net increase (decrease) in cash and cash equivalents
    -       (8,721 )     1,665       1,667       -       (5,389 )
Cash and cash equivalents – beginning of period
    -       69,763       7,716       1,040       -       78,519  
Cash and cash equivalents – end of period
  $ -     $ 61,042     $ 9,381     $ 2,707     $ -     $ 73,130  

 
19

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion of financial condition and results of operations should be read in conjunction with (i) our Consolidated Financial Statements, and notes thereto, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and (ii) our Annual Report on Form 10-K for the year ended June 30, 2012.
 
Forward-Looking Statements
 
Management's discussion and analysis of financial condition and results of operations and other sections of this Quarterly Report contain forward-looking statements relating to our future results. Such forward-looking statements are identified by use of forward-looking words such as "anticipates", "believes", "plans", "estimates", "expects", and "intends" or words or phrases of similar expression. These forward-looking statements are subject to management decisions and various assumptions, risks and uncertainties, including, but not limited to: the potential effects of natural disasters affecting our suppliers or trading partners; the effects of labor strikes; weather conditions that may affect sales; volatility in fuel, utility, transportation and security costs; changes in global or regional political or economic conditions, including changes in governmental and central bank policies; changes in business conditions in the furniture industry, including changes in consumer spending patterns and demand for home furnishings; effects of our brand awareness and marketing programs, including changes in demand for our existing and new products; our ability to locate new design center sites and/or negotiate favorable lease terms for additional design centers or for the expansion of existing design centers; competitive factors, including changes in products or marketing efforts of others; pricing pressures; fluctuations in interest rates and the cost, availability and quality of raw materials; the effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; those matters discussed in Items 1A and 7A of our Annual Report on Form 10-K for the year ended June 30, 2012 and in our SEC filings; and our future decisions. Accordingly, actual circumstances and results could differ materially from those contemplated by the forward-looking statements.
 
Critical Accounting Policies
 
The Company’s consolidated financial statements are based on the accounting policies used. Certain accounting polices require that estimates and assumptions be made by management for use in the preparation of the financial statements. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results and that require subjective or complex estimates by management. There have been no material changes with respect to the Company’s critical accounting policies from those disclosed in its 2012 Annual Report on Form 10-K filed with the SEC on August 16, 2012.
 
For the three and nine months ended March 31, 2013 and 2012, the Company has presented selling, general and administrative expenses as a single line on the Consolidated Statements of Comprehensive Income to remove information we believe is not meaningful and to improve comparability with peer companies. Selling expenses, general and administrative expenses, and restructuring and impairment charges had previously been presented separately.
 
Results of Operations
 
Our consolidated net sales and income before income taxes have improved year to date by 0.5% and 30.0% respectively over the prior year to date period. This has been driven largely by improvements in our retail segment's net sales and profitability, which have improved for several consecutive quarters as compared to the same prior year periods and has more than offset declines in our wholesale segment’s results during the first nine months of fiscal 2013.
 
 
20

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 
In our prior fiscal year ended June 30, 2012, we replaced the majority of the prototype products displayed on our design center floors primarily during the final three quarters of the 2012 fiscal year. This resulted in higher shipments from our wholesale operations, especially during the third quarter of fiscal year 2012. To make room for these products, our retail locations held frequent clearance events and incurred costs to facilitate new floor layouts. These efforts negatively affected retail results in the prior year but benefitted our wholesale business. We believe these product enhancements have positively contributed to our results in the current fiscal year. In our third fiscal quarter ended March 31, 2013, our wholesale shipments were also negatively affected by lower shipments to our international independent retailers, primarily in China. While consumer demand for Ethan Allen products in China grew, our independent retailer had accumulated inventory to support even higher sales and in anticipation of a higher number of design center openings. Our results in the third quarter of fiscal 2013 were also negatively affected by the adverse timing of the Easter and Passover holidays falling in March of 2013 versus April of 2012, and entering the quarter with lower backlogs due to design center temporary closures during Hurricane Sandy in our second quarter of fiscal 2013.
 
During the first nine months of fiscal 2013 we opened design centers in Montreal, Canada and Brussels, Belgium, initially incurring losses in these startup locations. We also launched www.ethanallen.ca our new multi-lingual website. These are our first company operated design centers in non-English speaking international markets.
 
We continue to invest significantly in (i) getting our messages across, (ii) the strength of our interior design professionals and management in our retail business, (iii) new technologies across key aspects of our vertically integrated business, and (iv) the ramp up of our North American manufacturing capacity where we manufacture approximately 70% of our products. Our competitive advantages arise from providing high quality products of the finest craftsmanship, offering complimentary design service through an estimated 2,000 motivated interior design professionals network-wide, providing free local delivery, our custom case goods offerings, enhancing our technology in all aspects of the business, and leveraging our vertically integrated structure.  Executing against all of these elements helps us achieve our mission of ‘Luxury Made Affordable’.
 
Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012
 
Consolidated revenue for the three months ended March 31, 2013 decreased 4.4% to $168.1 million, from $175.9 million for the three months ended March 31, 2012. The decrease is primarily due to lower shipments to our independent retailer in China.
 
At March 31, 2013, the Company operated 148 of the 296 global network design centers compared with 149 of the 299 at March 31, 2012. Our global network included 69 design centers in China at the end of both the current quarter and the third quarter of fiscal 2012. Our international net sales were 4.1% and 7.4% of consolidated net sales for the three months ended March 31, 2013 and 2012 respectively, a decrease of $6.1 million, or 47.1%. The majority of our international sales are to our independent retailer in China.
 
Wholesale revenue for the third quarter of fiscal 2013 decreased 10.7% to $108.1 million from $121.0 million in the prior year comparable period. The main drivers were lower shipments of prototype products and lower shipments to our retailer in China in the current period. Shipments of prototype products in the third quarter of fiscal 2012 had been at relatively high levels as we completed our major fiscal 2012 product enhancement and filled our channel with new products. Orders in the current quarter for our wholesale segment decreased by 6.4% compared to the same period last year.
 
Retail revenue from Ethan Allen-operated design centers for the three months ended March 31, 2013 increased 0.5% to $132.1 million from $131.4 million for the three months ended March 31, 2012. We believe the increase in retail sales by Ethan Allen-operated design centers is due to (i) our new product introductions, promotional marketing campaigns and the design solutions approach of our interior design professionals, (ii) continued use of both our national television and direct mail media campaigns, (iii) our digital communications to prospective clients, and (iv) the positive effects of continuously repositioning our retail network, partially offset by the timing of the Easter and Passover holidays mentioned previously, and a net decrease of one Ethan Allen-operated design center between March  31, 2012 and March 31, 2013. We ended the current quarter with 148 Ethan Allen-operated design centers.
 
 
21

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 
Comparable design centers are those which have been operating for at least 15 months. Minimal net sales, derived from the delivery of customer ordered product, are generated during the first three months of operations of newly opened (including relocated) design centers. Design centers acquired by us from independent retailers are included in comparable design center sales in their 13th full month of Ethan Allen-owned operations. Ethan Allen-operated design center total written business as well as comparable design center written business decreased 2.4% during the third quarter of fiscal 2013 compared to the comparable quarter of fiscal 2012. The frequency of our promotional events as well as the timing of the end of those events can impact the orders booked during a given quarter.
 
Gross profit was $91.8 million for the quarter ended March 31, 2013 and $94.3 million in the prior year comparable quarter. Gross margin for the March 31, 2013 quarter was 54.6%, up from 53.6% the prior year quarter. The improvement in gross margin was primarily due to (i) a stronger sell through of retail inventory, releasing profit contained in the retail segment inventory, (ii) a higher proportion of retail net sales to consolidated net sales (79% in the current quarter versus 75% in the prior year quarter), and (iii) operating efficiencies in our manufacturing plants during the quarter including the leverage of our operations in Mexico and Honduras. These factors were partially offset by reduced volume in our wholesale segment.
 
Operating expenses decreased $3.4 million to $83.1 million from $86.5 million in the prior year quarter due primarily to (i) operating efficiencies in our retail segment due to structural changes, and (ii) our ability to control costs due to our vertically integrated structure. These were partly offset by losses on the sale of vacant retail real estate and costs associated with our retail expansion internationally including new design centers opened in Montreal and Brussels during fiscal 2013.
 
Operating income and profit margin for the quarter ended March 31, 2013 was $8.7 million, or 5.2% of net sales, an increase of $0.9 million or 11.2% from the prior year quarter’s $7.8 million, or 4.4% of net sales. Wholesale operating income for the three months ended March 31, 2013 was $12.8 million, or 11.8% of sales, compared to $18.2 million, or 15.0% of sales, in the prior year comparable quarter. Retail operating loss for the third quarter of fiscal 2013 was $2.3 million, or a negative 1.7% of sales, compared to a loss of $6.5 million, or a negative 5.0% of sales the prior year. Improvements in consolidated operating income were driven primarily by operating efficiencies in our retail segment due to structural changes, partly offset by the reduced net sales in our wholesale segment.
 
Interest and other miscellaneous income, net decreased slightly to under $0.1 million compared to $0.2 million in the prior year.
 
Interest and other related financing costs remained consistent with the prior year quarter at $2.2 million.
 
Income tax expense for the three months ended March 31, 2013 totaled $2.1 million compared to a benefit of $21.8 million for the three months ended March 31, 2012. Our effective tax rate for the current quarter was a 32.2% compared to a negative 378.7% in the prior year quarter. The current quarter effective tax rate primarily includes tax expense on the current quarter’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain deferred tax assets, partly offset by the recognition of some uncertain tax positions. The prior period effective tax rate primarily includes the benefit from the reversal of valuation allowances, the recognition of certain previously unrecognized tax benefits, partly offset by the tax expense on the previous quarter’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on deferred tax assets in the retail segment.
 
Net income for the three months ended March 31, 2013, was $4.4 million compared to $27.5 million in the prior year comparable period. This resulted in net income per diluted share of $0.15 for the quarter ended March 31, 2013 compared to $0.94 per diluted share for the quarter ended March 31, 2012.
 
Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012
 
Consolidated revenue for the nine months ended March 31, 2013 increased 0.5% to $546.8 million, from $544.1 million for the nine months ended March 31, 2012.
 
 
22

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 
Wholesale revenue for the first nine months of fiscal 2013 decreased 4.8% to $327.7 million from $344.1 million in the prior year comparable period. The prior year net sales benefitted from shipments of prototype products as we implemented a major product enhancement during fiscal 2012. Orders in the current nine months for our wholesale segment decreased by 5.0% compared to the same period last year, primarily due to the phase out in prototype orders in the current year period for new products introduced as part of our fiscal 2012 major product enhancement which had contributed to results in the 2012 fiscal period. Our international net sales were 5.4% and 6.5% of consolidated net sales for the nine months ended March 31, 2013 and 2012 respectively.
 
Retail revenue from Ethan Allen-operated design centers for the nine months ended March 31, 2013 increased 4.2% to $433.0 million from $415.7 million for the nine months ended March 31, 2012. We believe the increase in retail sales by Ethan Allen-operated design centers is due to (i) our new product introductions, promotional marketing campaigns and the design solutions approach of our interior design professionals, (ii) continued use of both our national television and direct mail media campaigns, (iii) our digital communications to prospective clients, and (iv) the positive effects of continuously repositioning our retail network, partially offset by a net decrease of one Ethan Allen-operated design center between March 31, 2012 and March 31, 2013.
 
Comparable design centers are those which have been operating for at least 15 months. Minimal net sales, derived from the delivery of customer ordered product, are generated during the first three months of operations of newly opened (including relocated) design centers. Design centers acquired by us from independent retailers are included in comparable design centers sales in their 13th full month of Ethan Allen-owned operations. Written business of Ethan Allen-operated design centers increased 2.2% while comparable design centers written business increased 1.6% during the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012. The frequency of our promotional events as well as the timing of the end of those events can impact the orders booked during a given quarter.
 
Gross profit increased 3.3% during the first nine months of fiscal 2013 to $300.0 million (54.9% of net sales) from $290.4 million (53.4% of net sales) in the prior year comparable period. The increase in gross profit was primarily due to improved gross margin rates in our retail business due to efficiencies and improved pricing, and a higher proportion of retail net sales to consolidated net sales (79% in the current year versus 76% in the prior year). Wholesale gross profit was negatively impacted by the reduced production due to reduced need for prototype product in the fiscal 2013 period previously discussed.
 
Operating expenses increased $1.0 million to $256.0 million in the first nine months of fiscal 2013 from $255.0 million in the prior year comparable period due primarily to variable costs on higher net sales in our retail segment, and higher current fiscal period charges related to real estate and our international expansion, partly offset by operating efficiencies in our retail segment due to structural changes.
 
Operating income and profit margin for the nine months ended March 31, 2013 was $44.0 million, or 8.0% of net sales, an increase of $8.6 million or 24.3% from the prior year’s $35.4 million, or 6.5% of net sales. Wholesale operating income for the nine months ended March 31, 2013 was $37.7 million, or 11.5% of sales, compared to $49.6 million, or 14.4% of sales, in the prior year comparable period. Retail operating income for the first nine months of fiscal 2013 was $4.8 million, or 1.1% of sales, compared to a loss of $10.6 million, or a negative 2.5% of sales the prior year comparable period. Improvements in consolidated operating income were driven primarily by the 4.2% sales growth and operating efficiencies in our retail segment as previously discussed.
 
Interest and other miscellaneous income, net decreased $0.2 million to $0.2 million compared to $0.4 million in the prior year.
 
Interest and other related financing costs amounted to $6.6 million in the current year compared to $6.8 million in the prior year comparable period.
 
Income tax expense for the nine months ended March 31, 2013 totaled $13.3 million compared to a benefit of $13.5 million for the nine months ended March 31, 2012. Our effective tax rate for the current fiscal year period was 35.4% compared to negative 46.6% in the prior year. The current effective tax rate primarily includes tax expense on the current nine months net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain deferred tax assets, partly offset by the recognition of some uncertain tax positions. The prior period effective tax rate primarily includes the benefit from the reversal of valuation allowances, and the recognition of certain previously unrecognized tax benefits, partly offset by the tax expense on the previous quarter’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on deferred tax assets in the retail segment.
 
 
23

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 
Net income for the nine months ended March 31, 2013, was $24.3 million compared to $42.4 million in the prior year comparable period. This resulted in net income per diluted share of $0.83 for the current period compared to $1.46 per diluted share in the prior year period.
 
 
Liquidity and Capital Resources
 
At March 31, 2013, we held unrestricted cash and cash equivalents of $83.6 million, marketable securities of $18.2 million, and restricted cash and investments of $15.4 million. At June 30, 2012, we held unrestricted cash and cash equivalents of $79.7 million, marketable securities of $9.0 million, and restricted cash and investments of $15.4 million. Our principal sources of liquidity include cash and cash equivalents, marketable securities, cash flow from operations, amounts available under our credit facility, and other borrowings.
 
In September 2005, we issued $200.0 million in ten-year senior unsecured notes due 2015 (the "Senior Notes"). The Senior Notes were issued by Global, bearing an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1. We used the net proceeds of $198.4 million to improve our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes. During the full fiscal years 2011 and 2012, the Company reduced its Senior Notes by an aggregate face value of $46.6 through unsolicited purchases.
 
We also maintain a $50 million senior secured, asset-based revolving credit facility (the “Facility”). We have not had any revolving loans under the Facility at any time. At March 31, 2013 and June 30, 2012, there were $0.6 million of standby letters of credit outstanding under the Facility. The Facility is subject to borrowing base availability and includes a right for the Company to increase the total facility to $100 million subject to certain conditions. The Facility is secured by all property owned, leased or operated by the Company in the United States excluding any real property owned by the Company and contains customary covenants which may limit the Company’s ability to incur debt, engage in mergers and consolidations, make restricted payments (including dividends), sell certain assets, and make investments. Remaining availability under the Facility totaled $49.4 million at March 31, 2013 and at June 30, 2012 and as a result, covenants and other restricted payment limitations did not apply. The Facility expires March 25, 2016, or June 26, 2015 if the Senior Notes have not been refinanced prior to that date.
 
At March 31, 2013 and June 30, 2012, we were in compliance with all covenants of the Senior Notes and the Facility.
 
 
24

 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
 
 
A summary of net cash provided by (used in) operating, investing, and financing activities for the nine month periods ended March 31, 2013 and 2012 is provided below (in millions):
 
   
Nine months ended
March 31,
 
   
2013
   
2012
 
Operating Activities
           
Net income plus depreciation and amortization
  $ 37.8     $ 56.5  
Working capital items
    2.0       (10.1 )
Other operating activities
    4.6       (18.6 )
Total provided by (used in) operating activities
  $ 44.4     $ 27.8  
                 
Investing Activities
               
Capital expenditures and acquisitions
  $ (17.1 )   $ (20.3 )
Net purchases of marketable securities
    (9.6 )     1.4  
Other investing activities
    4.5       3.5  
Total provided by (used in) investing activities
  $ (22.2 )   $ (15.4